Don't get carried away

Commentary: Market beaters are only slightly more bullish than the laggards

ANNANDALE, Va. (MarketWatch) -- The stock-market timers who have beaten a buy-and-hold are on balance more bullish right now than the laggards.

That's good news, on the theory that the winners are more likely to have correct forecasts than the losers.

The bad news is that the market beaters are only slightly more bullish than the laggards.

So by no means should we let any short-term optimism metamorphose into irrational exuberance.

Consider the consensus market-timing opinions of the market-beating and market-lagging stock market timing services tracked by the Hulbert Financial Digest. For the purposes of this exercise, I focused only on the performance of an adviser's stock market-timing advice -- ignoring for the purposes of this exercise how good or bad he may have been at picking individual stocks or mutual funds.

As a reality check on my findings, furthermore, I focused on performance over various lengths of time, from as short as the last five years to as long as the last 20.

The accompanying table lists the average recommended equity exposures that currently exist among these various groupings.

Performance compared over this many years through October 31, 2009...

Average equity exposure among market timers that beat a buy-and-hold

Average equity exposure among market timers that lagged a buy-and-hold

5 years

53%

52%

10 years

63%

56%

15 years

65%

51%

20 years

61%

61%

Average

61%

55%

Notice that there is a six percentage-point difference (61% versus 55%) between the equity exposures of the market beaters and the laggards. The last time I devoted a column to an analysis similar to this, in June, the difference was just two percentage points.

Not a big shift towards greater bullishness among the market beaters, to be sure, but still a move in a positive direction.

Another difference between now and five months ago: In June, for both the five-year and 20-year time frames, the market laggards were actually recommending a higher equity exposure than the market beaters. For no time frame is this true today, in contrast.

For the record, I should stress that the contrast between the best and worst timers has not always been useful in gauging the market's trends. This contrast was profoundly unhelpful during the bear market that began in October 2007, for example, since for much of that bear market, the market beaters were significantly more bullish than the market laggards.

But no system is perfect, needless to say. And the contrast between the best and worst timers has been valuable on other occasions. At the top of the bull market in March 2000, for example, right before the Internet bubble burst, the best timers were markedly less bullish than the worst timers. And during the 2002-2007 bull market, the market-beating timers almost always were more bullish than the market laggards.

The bottom line? More bullish than bearish, but only slightly so.

We most definitely should not get carried away.

Mark
Hulbert

Mark Hulbert has been tracking the advice of more than 160 financial newsletters since 1980.

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